In preparation for PNK's Q4 earnings release tomorrow, we’ve put together the recent pertinent forward looking company commentary.



Pinnacle Entertainment Enters Into Definitive Agreements to Divest Boomtown Reno and Adjoining Land Acreage (11/10/2011)

  • Total proceeds from the transactions are expected to be approximately $22.2 million, with the potential for an additional $3.8 million if an option granted to the casino-resort buyer is exercised.
  • Sold to M1 Gaming Reno, LLC and SJP Reno Property, LLC for total cash consideration of approximately $12.9 million. In addition, the Company granted the buyers a one year option to purchase 100% of the Company's membership interest in the current gaming licensee, PNK (Reno), LLC and additional land adjacent to Boomtown Reno for $3.8 million. This transaction is subject to regulatory approval and is expected to close by mid-2012.


  • "An interesting trend we're seeing is the growth from the younger customers, although the core growth is coming from 40 to 59 year olds, guests under 40 are increasing when compared to prior years. This growth from those under 40 is seen in both slots and tables, whereas tables usually skew younger."
  • "Bossier continues to be a difficult market while we have outperformed the market over quarter-to-quarter across our market segment, we believe this market will continue to be under some pressure."
  • "At Belterra, we believe the competitive dynamics of this smart deal will continue to be challenged for some time where our focus on rationalizing marketing reinvestment as well across all our portfolio, but particularly at this property, to improve results."
  • [myChoice] "We are recognizing expenses on our books ahead of the actual cash out flow. We have been very pleased with the performance of the program and the program remains at least cost neutral, and we expect to see additional improvements into operations as the program continues to see them."
  • "We continue to work through some of these changes and as stated we expect that the increase will be no more than 3% of the budget. And our opening day continues to be summer of 2012.  We expect to have a more definitive timeframe with a specific date by the end of the year as well."
  • "At River Downs we expect resolution of regards to the horsemen's fee subsidy by the end of the year. All of you likely saw the losses that was filed last week challenging the constitutionality of VLTs at racetracks. So there's more to come on this development in the coming weeks and months ahead. We remain hopeful that we will have authorizations to add VLTs at River Downs and that the redevelopment of that facility will start in 2012."
  • "Approximately $32 million was drawn at the end of the quarter, and as far as liquidity we also expect to receive a refund of the $25 million deposit that we had with the Louisiana Gaming Control Board for the Baton Rouge project following the opening of that facility."
  • [Capex] "We expect the fourth quarter to be roughly around $65 million of which $45 million of that should be Baton Rouge."
  • [St. Louis capex] "To relate to the second question on regards to the $82 million, about two-thirds of that won't get spent until '13, and the reason for this ageing is we wanted to limit our parking disruption associated with the construction there, so we're building the garage first, that should be in line by the end of the year, next year, and the hotel which is a big piece of that $82 million, and the multi-purpose room won't actually get going until '13. So from a timing perspective, two-thirds would probably be a good benchmark to assume goes into '13 versus what will go into '12. And we expect the complete project to be completed by the end of '13."
  • [Margin progression] "I will tell you that we're still in middle innings."
  • "The hotel on the Ho Tram Strip is already topped off and the low rise is closed to being topped off.  MGM, as the operator, is fully engaged and we are extremely encouraged by what we see the progress that they're making. We expect that that property will open the early part of '13, and to date, there's nothing to report on a change in the budget.  There was a financing that was completed prior to us investing of a syndicate of Vietnamese banks as we've noted earlier, and that financing is in place, there will be additional financing mostly driven by working capital needs that will get secured later on through the construction process, at some point towards the end of next year."
  • "We think that the environment from a marketing spend perspective has been very traditional throughout every market that we are in, and I think you've seen similar commentary I think from all our competitors, and that we hope it's sustainable, think that it has been tough to judge what other people will do."
  • "We continue with River Downs and every property to look at the most efficient way to run that property. It's highly unlikely that we're out of racing season right now. We in the simulcast. It's highly unlikely that you'll see in the current quarter where we're in, or even the first quarter, that we would achieve breakeven. You saw from the release that we did have an unusual one-time medical expense there, which we don't know, there could be another medical expense there, but we're working to just try to keep the loss there as small as we can while running a property that we feel good about our guests walking into. So, I would tell you the next couple of quarters you shouldn't expect to see us at a breakeven there, but you shouldn't expect it to be beyond what we reported this quarter, should be even a bit better."
  • [Baton Rouge] "A lot of the actual spend will actually come due until after the facility opens. In River City we saw our last set of bills, call it five, six months after the property opened. So, while it is going to be rather accelerated, by virtue of the delay we're actually able to go into fixed priced contracts on a lot of the things that were part of the GMP on the construction side, and over 95% of the hard cost is now known and under contract. So, we do think that while it will be accelerated next year, that we will be able to maintain that schedule."

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KSS/JCP: Bring on the Heat

OK, this is purely anecdotal, but check out for JCP vs. KSS. We won't say that JCP nailed it, but it certainly looks clean. KSS is a mess. Competition WILL heat up. At least one of them actually made an effort to be ready for Valentine's Day.


KSS/JCP: Bring on the Heat - jcp


KSS/JCP: Bring on the Heat - kss1

KSS/JCP: Bring on the Heat - kss

Triangulating Latin America


  • Qe3 Is a Risk to Latin American Growth via The Bernank Tax
  • Quantifying the YTD Froth Across Emerging Market Asset Classes
  • Brazil Takes a Step Forward Towards Sustainable Long-term Economic Development… And Then a Step Backward

Current Virtual Portfolio Positions in Latin America: None


Qe3 Is a Risk to Latin American Growth via The Bernank Tax

As we highlighted in our Friday note titled “Triangulating Asia”, we view the implementation of Qe3 as a downside risk to real GDP growth across Latin America, largely supported by the following equation – at least until global food and energy prices stop being priced in U.S. dollars:


Quantitative Easing = accelerating inflation [globally] = monetary policy tightening [globally] = slower growth [globally]


While our quantitative signals are not yet in confirmation from a DXY perspective, we think it is an acute risk to monitor, given the academic dogma, short-term political resolve, and career risk management of the current Federal Reserve Chairman ahead of the 2012 presidential election. We’re in the process of quantifying how Bernanke can help ensure his “boss” gets reelected come NOV and preliminary indications is that the S&P 500 leads Obama’s probability of getting reelected with a fairly high r². We’ll be out with more on this in the coming weeks.


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Turning back to Latin America specifically, we saw YoY inflation readings across the region peak on a median basis in DEC, falling -20bps sequentially +4.2% in JAN. A near +200bps increase in median inflation rates across the region since Jackson Hole ’10 has coincided with a +200bps increase benchmark monetary policy rates across the region, a linkage highlighted by the aforementioned equation.


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In our view, further slowing from here in Latin American inflation readings is largely USD-dependent, given its omnipotent role in determining global commodity prices and the [rightful] heavy weightings of food and energy prices in EM CPI readings. As of now, Latin American interest rate markets are taking the Bernank’s word for it, pricing in less monetary easing/more monetary tightening in recent weeks (with the lone exception being Brazil, where political pressure to lower nominal interest rates in the country remains the #1 factor).


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All told, we continue to be in wait-and-see mode for further signs of the duration of the latest Inflation Trade. We’d be remiss to not call out the added liquidity from short-term E.U. sovereign debt crisis aversion as positive in the short-to-intermediate term for Latin American equities and FX. In the intermediate-to-long-term, however, centrally-planned Policies to Inflate will negatively impact this region from a growth perspective just as it did in late 2010 through 2011. It’s no wonder Brazil’s Bovespa Index – the regional benchmark equity index – peaked in early NOV 2010 as a leading indicator for the stagflation that largely ensued across Latin American economies in 2011.


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Quantifying the YTD Froth Across Emerging Market Asset Classes

Speaking of the added benefits of liquidity, capital flows have been very supportive for EM assets in the YTD. So much so that the MSCI EM Equity Index is already up +13.7% YTD – the highest YTD return (through FEB 13) in over 15 years! The MSCI Latin America Equity Index is off to a similar start, closing today up +15.3% YTD – also a 15yr-plus high.


Looking to EM currencies (using UBS’ Carry Trade Index and JPM’s Global FX Volatility Index as proxies), we see that carry-trading strategies have returned +5.5% in the YTD – the best start to the year since 2001. On a vol. basis, the -20% YTD decline in global FX volatility – also a 15yr-plus high – has been incrementally supportive of capital flows to emerging markets, like Latin America.


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One of the ways higher exchange rates and lower exchange rate volatility helps to inflate EM assets is through global capital flows – particularly as investors in developed markets rush to embark on a global search for investment yield.


To help “quantify the froth”, we use Brazil as a proxy, given its allure of G20-high real interest rates and its marketability as a “BRIC” economy, we see that debt capital flows are indeed flooding back to emerging markets after a quiet 2H11 where deals were hard to price amid heightened volatility. Using the USD as the funding currency, global investors have financed $16.6B in Brazilian debt issuance in the YTD, up from just $6B in the entirety of 2H12.


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Looking at Bovespa Stock Exchange data, international investors pumped a net R$7.2B into Brazilian equities in the month of JAN alone – an all-time high using the 4yr data set – and is on pace to top that in FEB.


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So what does this all mean? For one thing, it’s quite clear the global investors: a) took the opportunity of lower cross-asset volatility to load up on their favorite EM equity/fixed-income/FX plays at depressed prices; and b) the Federal Reserve’s implicit pledge to maintain ZIRP in near perpetuity is supportive of cross-border investment flows out of U.S. assets, on the margin, and into higher-yielding EM assets for the foreseeable future (not at every price, of course).


What could get this trend to reverse? A marginal shift in the direction towards sober fiscal and monetary policy in the U.S. could get both domestic and international investors to become increasingly comfortable holding U.S. assets on the margin, which would be supportive of the USD. Moreover, a stronger dollar backed by marginally hawkish monetary policy would depress the real yield advantage of emerging markets by allowing them to lower interest rates as inflation falls sustainably.


Do we see any of this happening? Certainly not in the near term, as the DXY is broken from an immediate-term TRADE perspective (see chart above). Bullish TAIL, however, we view this as a long-term tail risk, given where we are in the U.S. political cycle.


Brazil Takes a Step Forward Towards Sustainable Long-term Economic Development… And Then a Step Backward

Last week, Brazil auctioned licenses to the private sector for the right to operate airports in three of the nation’s busiest travel hubs. The licenses sold for R$24.5B ($14B) – or nearly five times the minimum bid – and each carries a mandate to invest R$16.1B into expanding capacity in the airports in time for the 2014 World Cup (500,000+ visitors expected) and 2016 Summer Olympics. The three airports involved accounted for ~33% of the country’s 179 million passengers last year and 57% of its air cargo.


Brazilian airports, which are notoriously overcrowded and operating well over capacity (12% of flights delayed in 2011 and 5% canceled outright), have seen passenger traffic increase +118% since 2003, making Brazil third in volume of domestic air travel behind the U.S. and China.


While the Brazilian government plans to maintain a 49% stake in each consortium (paid for by borrowing from the state bank BNDES – which the gov’t itself funds!), we view the increased private-sector participation as bullish for Brazilian GDP growth in the short run as the goals underpinning these infrastructure projects shift from utility maximization to profit maximization, meaning delays and circumventing bureaucracy are less of a risk going forward.


And now, the bad news (from Moshe Silver, our resident Portuguese-speaking translator of the Brazilian local press):


“Rousseff looks to curb bank profits – President Rousseff has asked her economic team for proposals to narrow lending spreads and reduce bank profits, which she says have been excessive. At a time when the central bank is lowering the SELIC rate, she says, banks should not continue to profit from exaggerated spreads.


Pressure will be put on financial institutions to lower their lending rates, especially on credit cards, as consumer credit is seen as a critical driver of economic activity this year. The government has a broad list of options to consider, including caps on profitability and possible tax reductions on credit operations, and reduction of bank reserve requirements.”


Net-net, Brazil continues to define the term “emerging” market quite well, offering promises of robust growth opportunities with the occasional hiccup along the way, usually in some form of anti-private sector interventionist policy. We’ll keep you posted on any further developments regarding the bank profits story, as it has clear implication for Brazil’s short-to-intermediate-term GDP growth.


Fundamental Price Data

All % moves week-over-week unless otherwise specified.

    • Median: +0.5%
    • High: Venezuela +9.4%
    • Low: Peru -2.1%
    • Callout: Latin American equity markets are up +13.6% YTD on a median basis
  • FX (vs. USD):
    • Median: +0.1%
    • High: Brazilian real +0.5%
    • Low: Argentine, Mexican peso both -0.2%
    • Callout: Argentine peso -0.9% YTD vs. a regional median of +8.6%
    • High: Colombia +8bps
    • Low: Brazil -29bps
    • Callout: Brazil -80bps YTD vs. Colombia +4bps
    • High: Mexico +10bps
    • Low: Brazil -12bps
    • Callout: Brazil +4bps YTD vs. Mexico -30bps
    • High: Brazil +17bps
    • Low: Colombia -4bps
    • Callout: Brazil +85bps YTD vs. Colombia -34bps
  • 5YR CDS:
    • Median: +0.3%
    • High: Argentina +7.6%
    • Low: Chile -3.6%
    • Callout: Argentina +2.7% over the last six months vs. a regional median of -12.4%
    • High: Colombia +6bps
    • Low: Brazil -13bps
    • Callout: Brazilian swaps market pricing in -116bps of cuts over the NTM
    • High: Mexico +2bps
    • Low: Brazil -2bps
    • Callout: Brazil -59bps YTD vs. Colombia +18bps
  • CORRELATION RISK: The liquidity trade prevails for now, with the MSCI Latin American Equity Index trading with a -0.86 correlation vs. the DXY on a 30-day basis, up from flat on a 90-day basis.

Darius Dale

Senior Analyst


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HBI Price Disparity = Uncertainty


Conclusion: HBI’s quarter might be fine, but we think the market knows it. A wide gap remains in pricing for core product amongst HBI’s largest customers, and this is at a time when competition will heat up. Cost will come down in 2H, but we think price comes down faster. If HBI is up on the print, we’d short it.


We’re still seeing a meaningful price disparity for HBI product across Mid and Discount channels. There’s a lot of ways we can slice the numbers, but there’s no disputing the inconsistency we’re seeing at retail. Of particular note is Kohl’s, who is pricing product 50% above JCP – and that’s after BOGO incentives.  WMT and Amazon are nearly the same step down yet again, but for product that is almost identical to KSS and JCP (something tells us that Ron Johnson is keenly aware of this). With over half of HBI’s EBIT coming from US mass and department store channels – the very channels that we think will face considerable pressure and volatility in 1H12 – we still think that HBI has meaningful earnings risk.

How to play it? The company whiffed the third quarter, and took 4Q down to a level that is consistent with their visibility at the time – likely with some breathing room. But we don’t think that 4Q is the issue here. HBI is banking on maintaining price increases in 2H. But we simply don’t think that industry dynamics will allow them to stick. In addition to the dominos that we expect to fall due to actions at JCP/KSS/SHLD and subsequently Macy’s, Target, Wal-Mart and perhaps Amazon, bulls should note that we already saw WMT cut 7 points of revenue out of HBI’s core due to a shift to private label. This is BEFORE competition started to heat up. 

A common response here is “what about easier cotton compares?” That’s valid, but we think that price will come down at a greater rate than cost. That’s bad.

Here’s a snapshot of Hanes, Gildan/Starter, and private label pricing at the mid-tier as represented by JCP and KSS as well as WMT and AMZN along with some interesting callouts:

  • There is a significant price differential between JCP and KSS in like-for-like basic men’s underwear (6pk crew t-shirts). On a price/unit basis, JCP now prices Hanes 12-15% lower than KSS.
  • The other common brand Jockey, is priced 47% lower at JCP in this category.
  • In Private Label, JCP’s Stafford line is actually priced 3% higher than KSS’s Crofts & Barrow.
  • Comparable men’s underwear (Hanes 4pk boxer briefs) had the most significant price disparity ($13.46 at WMT; $16.99 at AMZN; $25 at JCP; $36 at KSS) between retailers. At a 167% premium, KSS will need to seriously visit its current price positioning.
  • At WMT, Hanes maintains its 10%-20% premium positioning, or $1-$2 price gap differential from competitors Fruit of the Loom and Starter in the underwear segment (crew t-shirts and tanks) as well as socks, while boxer briefs are indeed now at parity.
  • In looking at AMZN’s online pricing, it appears WMT is the only retailer where the two brands are at pricing parity in the boxer brief category.

HBI Price Disparity = Uncertainty - HBI Pricing v Comps


HBI Price Disparity = Uncertainty - HBI Pricing v Comps by retailer

HBI Price Disparity = Uncertainty - HBI Pricing v Comps WMT


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